We also know that the sale of each lot can be used for a separate, individual 1031 purchase.

We also know that the sale of each lot can be used for a separate, individual 1031 purchase.

., and in NY, the rates you pay depends on the number of employees and LLC's separates one entity from another.

I also have an idea that maybe we could put some work into the house, split it into two separate units (upstairs and downstairs) and be able to increase the total amount of rent by 40-50% of its current amount.

While it isn't common, people do back out prior to move in and I think it is unreasonable to think they should lose the entire SD.When we collect funds prior to move in we have them sign a separate document (lease is not signed until move in day or very close to it) that spells out what that money is counted as and what it is converted too if the lease moves forward and if they back out.  

(I understand we must both live in separate units and have the finances/means to be approved and cover our share of the said mortgage ).

Or, until you have a real estate empire then just file a Ficticious Business Statement and use a DBA and you can still get separate tax ID numbers from the IRS for each DBA.I am cheap and before making every business decision I often think about everything for several months, or even several years.

Aside from consulting with a real estate attorney to look over agreement and CPA/tax attorney to review financial implications/consideration of forming a separate entity (i.e., LLC).

First being that you need to separate the lots. 

Now I understand having a system for each property and will remove the emotional attachment to the property.